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Direct FX Weekly Update - 10 Jan 2011

Written by Sam Coxhead on January 10th, 2011.      0 comments

Currency Commentaries:

Click to access our currency pair reports:  
NZD/USD                                      AUD/USD                                    GBP/USD
NZD/AUD (AUD/NZD)                    AUD/GBP (GBPAUD)                    GBP/EUR (EUR/GBP)
NZD/GBP (GBP/NZD)                    AUD/EUR (EUR/AUD)                   GBP/RAND

Major Announcements last week:


  • US Factory order rise much more than expected in November
  • FOMC minutes show economy growing faster than expected
  • UK Manufacturing numbers stronger than expected
  • US Non-manufacturing activity higher than expected
  • Canadian unemployment rate drops to 7.6% from 7.7%
US employment numbers mixed-unemployment rate lowers to 9.4% 

Market Overview:

In the period between Christmas and New Year, the level of liquidity or depth of the market deteriorated to levels not seen in years. These very low levels of liquidity saw moves accentuated, and we saw extremes in a number of currency pairs as larger market participants scrambled to get within end of year allocations. There is little point dwelling on the market through this period as the most that can be garnered from it is that it is best to stay out of market when these conditions prevail. Interestingly over the Christmas break, China surprised the market with a 25pt hike in their core interest rates as part of a program to reel in their rampant inflation. Over the past months they have utilized a number of tools to attempt to curb inflation, and it will be interesting to see how this plays out over the coming year.
Starting into the New Year we saw a reversal of most of the extremes that were reached in the week previous. The US dollar has been in demand for the most part, and this has seen it appreciate by over 2.5% against the basket of its major trading partners. This has been driven by the mostly positive economic data flowing from the US of late. Friday in the US saw the monthly employment numbers released. Whilst the headline Non Farm Payrolls number we weaker than the expected 150k at 103k, the previous two months were revised up by 70k and the unemployment number dipped to 9.4%. Once the market settled down after an hour or two after these numbers were released, most markets were relatively unchanged.
The big theme of the last week has been the underperformance of the EURO. The New Year has seen further focus on the Govt debt situation in Europe and in particular Portugal’s ability to finance itself by selling bonds.  Reports are that Euro-zone pillars Germany and France are putting pressure on Portugal to approach the EU/IMF for a funding program. If Portugal were to do this in a timely manner, it would make sense that pressure would be taken off other member states that are seeing funding prices rise, such as Spain and Belgium. Should Spain end up needing assistance, the current  bailout facilities at the EU would be almost completely tapped, and certainly see the EURO as single currency under considerable pressure. China has repeatedly vocalised its support for the EURO, and has been buying member state bonds actively, but at this stage their support has not been enough to stem the tide of rising funding costs for peripheral states.
The Australian dollar has quickly retreated from the post float high set before New Year of 1.0257 as the massive flooding in Queensland and USD resurgence helped turn sentiment for the time being. The Queensland flood damage has Australianpress suggesting that the flood impact will delay interest rate increases from the RBA. Also adding to the mix was a large down day for the commodity markets which saw the AUD, CAD, RAND and NZD all under pressure as commodities across the board quickly fell.
In the UK calls for interest rate hikes in 2011 have gathered a little stem. With increased Inflation Expectations of 3.5% for 2011, it can be expected that bias will have to sway at the Bank of England at the very least. Improving manufacturing and mortgage approvals numbers also adding weight to the Pound Sterling story, which will be balanced by the fortunes in Europe, being the major destination for UK exports.